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Next election cycle, when an employee makes a personal political contribution,
beware: it could harm a company’s ability to win government contracts.

Many municipalities and some states are passing so-called pay-to-play rules that are
designed to discourage contractors, and in some cases their executives, from contributing to
candidates who have the authority to issue or influence government contracts. The rules set
limits on contributions or exclude them outright. “For prosecutors, it’s hard to show a quid pro
quo between a contribution and a contract,” notes Wesley Bizzell, an attorney specializing in
campaign-finance law at Winston & Strawn. “Pay-to-play rules make enforcement easier and
get around the burden of proof.”

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Illinois is currently considering legislation that would restrict campaign contributions by
government vendors. New Jersey’s pay-to-play law went into effect in January. And such states
as California and Ohio, as well as the cities of Houston, Los Angeles, Philadelphia, San Francisco,
and Oakland, Calif., have similar rules in place.

The restrictions could create potential
problems for companies that lack diligence in
tracking contributions from their executives and
political-action committees. Robert Kelner, a
partner at law firm Covington & Burling and
chair of the firm’s election and political law
practice group, notes that more companies are
starting to subject their political activities to
compliance programs. And some are adding
a new position—political law compliance
officer—to lead the effort. The intense scrutiny
comes on the heels of a number of scandals
involving campaign contributions and lobbying
efforts. For example, prosecutors are still investigating
allegations that Mitchell Wade, founder
and former CEO of San Diego defense contractor
MZM Inc., made illegal campaign contributions to a number
of influential lawmakers. He has pleaded guilty to making
bribes to former representative
Randy Cunningham (R–Calif.), who also pleaded guilty
and is serving a sentence of eight years and four months.

Companies are keeping a closer eye on executives’
personal political giving as well. In August, Oracle
announced that it would offer executives legal assistance
on the filing of such contributions. The move
will help the software giant avoid running afoul of
complex contribution rules. “We’ve begun to see corporations
dedicating manpower and resources to these
particular types of compliance issues and amending
corporate policies because the cost of noncompliance
is getting higher,” says Caleb Burns, an attorney at
Wiley Rein & Fielding.

Investors, too, are demanding more transparency
on political giving. Last proxy season, proposals
calling on companies to disclose campaign contributions
accounted for nearly 18 percent of all socialpolicy
proposals put to a shareholder vote, according
to a report by Proxy Governance Inc.

It is still unclear how strictly pay-to-play rules
will be enforced. “I suspect some large companies will
get into trouble because they will become aware of
[these laws] only when there is a big enforcement
action,” predicts Kelner. “It might take some time to see
how much teeth they have.”

Then again, given the combative political environment,
it shouldn’t take long for one side to demand
that the rules be put to the test.